Going consternation: auditors are seeking more and more assurances from their clients about their businesses' continuing viability before they will sign off their accounts without qualification. Robin Johnson explains the liabilities facing directors.

AuthorJohnson, Robin
PositionLegal briefing

Earlier this year the Financial Services Authority met the UK's top audit firms to discuss its concern that auditors may seek to make qualified judgments in the annual accounts of the banks about their capacity to continue as going concerns. Any qualified opinion on a bank's audited accounts will have a knock-on effect on its corporate borrowers: if a primary lender has qualified accounts, how can the borrower not also have its accounts qualified, because its counterparty risk and liquidity risk are affected by the bank's ability to lend?

But there is also a wider sense of unease about going-concern statements. The Companies Act 2006 requires the directors of a company to include a business review in the annual report and accounts. This review requires "a balanced and comprehensive analysis of the development and performance of the business of the company during the financial year and the position of the company at the end of that year". It requires a "description of the principal risks and uncertainties facing the business". This has increased directors' exposure in relation to their assessment in supporting a going-concern statement and appropriate regulatory disclosures. Accounting standards also require directors to make an assessment of their company's ability to continue trading and to disclose any uncertainties that they are aware of in making that assessment. Listed companies must adhere to the listing rules, too. These require a statement in the annual report that the business is a going concern, together with any disclosures about relevant assumptions or qualifications.

These requirements are likely to increase in significance as a result of the economy's current illiquidity. Auditors will require detailed evidence from directors to support any statement about a company's

status as a going concern. They are already requiring companies to provide more detailed risk and contingency planning information than ever. Boards that are currently considering what to include in their business reviews will need to look carefully at a number of factors. They must assess not only their own position, but also that of their suppliers' and customers' audited accounts and what these say about their positions. As in the case of the banks, if the accounts of a company's key supplier include a qualified opinion, the directors need to analyse carefully how that will affect their own company's situation.

It has always been standard...

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